This invention relates to methods and apparatus for implementing and administering an insurance investment program to fund future liabilities whose present cost is known and whose future cost is unknown but can be projected with some risk factor. In particular, this invention relates to a method and apparatus for issuing a floating rate zero coupon note to fund a future liability whose projected due date and whose present cost are known but whose future cost is unknown but can be projected with some risk factor. More generally, this invention relates to a method and apparatus for issuing a financial instrument in the form of a floating rate zero coupon note the interest rate on which varies automatically with the rate of inflation or the cost of some specified service or commodity and the interest payments on which are automatically reinvested, and for funding this floating rate zero coupon note such that the funds available through the investment of the proceeds from the sale of floating rate zero coupon notes and the reinvestment of interim cash flow will be sufficient to cover in full in a timely manner the cost of redeeming any floating rate zero coupon note whether redemption occurs on the stated maturity date of the floating rate zero coupon note or prior thereto.
Generally, insurance programs are designed to protect against the uncertain need to fund a potential future liability of certain value, for example, a presently defined replacement value for a car or home, or the need to provide a source of income in case of death, or against a relatively large liability with a relatively small probability of occurrence, for example, permanent disability or personal injury liability, but are not available to fund a relatively certain future liability of uncertain cost, such as the cost of future college education or the cost in the future of purchasing a house. An individual can attempt to self-insure by acquiring a portfolio of securities, investing in a mutual fund, or making some other form of investment. Mutual funds have come into existence to lower the risk which an individual must assume in investing his assets by combining the assets of many individuals into a common fund invested in a diversity of assets. These programs are managed to maximize their yield. However, such an investment program will not truly defease the future liability because the yields available on financial and other assets are tied directly to the specific risk-return characteristics of those assets and these bear no direct relation to the rate at which the cost of some unrelated future liability, such as the cost of a future college education, may escalate. Accordingly, an individual who faces a relatively certain future liability of uncertain cost who attempts to fund this future liability on his own faces a significant risk that the future liability may be underfunded.